Gibraltar is a Crown colony, connected by a narrow isthmus to southern Spain. The Gibraltar government is responsible for defined domestic matters, whilst the UK is responsible for Gibraltar's defence, foreign affairs and internal security. The Island has its own legal system, based on British common law but with its own statutes, known as ordinances. Some English Acts are extended to Gibraltar by Order in Council, others are enacted as ordinances and other areas are applied directly by the Gibraltar House of Assembly. Gibraltar is treated as a part of the member state of the UK for EU purposes and is included for all matters with the exception of the Common Customs Tariff, Common Agricultural Policy and Harmonisation of Turnover Taxes (notably Value Added Tax). Gibraltar's Companies Ordinance is based on the English Companies Act 1929. The incorporation of a Gibraltar company is usual in order to apply for a tax exempt qualifying company. The Income Tax Ordinance governs the taxation of companies in Gibraltar. The assessment basis for resident entities in on worldwide income, after deducting expenses wholly and exclusively connected with the production of the entity's income.
Non-Resident Controlled Companies
The income and profits of Gibraltar non-resident owned and controlled companies, which do not trade in, earn or remit income to Gibraltar are not liable to Gibraltar corporation tax. Annual accounts have to be submitted to the tax authorities in Gibraltar, together with written confirmation that the company fulfils the aforesaid requirements.
The Exempt Company
Gibraltar's main offshore vehicle is the exempt company, which is registered under the Companies (Taxation and Concessions) Ordinance. An exempt company is so termed because it qualifies for certain exemptions from income tax, estate duty (abolished in 1997) and stamp duty. Apart form exemption from tax on profits, no tax is charged or payable on dividend, interest, directors fee, annual payment or other sum payable by the company to any person who is neither a Gibraltarian or a resident of Gibraltar. Estate duty was abolished in 197. To qualify for exemption, the following conditions must be complied with:
- the company must not trade or undertake any business in Gibraltar, unless with a non-resident or with other exempt or qualifying companies, unless the consent of the Gibraltar authorities has been obtained;
- the company must have a paid-up share capital of not less than UK£100 or the foreign currency equivalent;
- no Gibraltar resident or Gibraltarian may hold any beneficial interest in the shares of the company;
- the company must pay its annual exemption tax on 1 March of each year;
- the company must keep its register of members in Gibraltar;
- the company must not change its beneficial ownership, objects, increase its share capital or change it name without first obtaining consent; and
- a director or the company secretary must be resident in Gibraltar.
The Qualifying Company
A qualifying company is a company registered under the Income Tax (Qualifying Companies) Rules. These companies can either be incorporated in Gibraltar or can be a company incorporated overseas but registered in Gibraltar. Qualifying companies put tax on profits at prescribed rates, being not less than 2% nor more than 18%. The usual rates, with the exception of loan interest which is exempt from taxation, directors' fees or annul payments made by a qualifying company to a non-resident person, other than a permitted individual, is taxed at the prescribed rate. Any dividend declared by the company is subject to tax at the rate prescribed to be paid by the company. All shares, loans and debentures held in, and policies of life assurance issued by a qualifying company are exempt from estate duty, so long as they are not made by a Gibraltarian or a resident. In order to register, the following conditions must be complied with:
- no Gibraltarian or resident of Gibraltar may have a beneficial interest in the shares;
- the company's paid-up share capital must be UK£100 or the equivalent;
- the company must not trade or undertake any business in Gibraltar except with other qualifying companies, qualifying individuals, exempt companies or non-residents;
- the company's register of members must be kept in Gibraltar or, if a registered branch of an overseas company, a certified true copy thereof;
- the sum of UK£1000 must be deposited with the Gibraltar Government as security for future taxes;
- a fee of UK£250 must be paid for the Qualified Certificate; and
- the company secretary or a director must be a resident of Gibraltar.
Parent-Subsidiary Rules And The Gibraltar 1992 Company
EU legislation regarding dividends paid across borders between member states has been implemented in Gibraltar. Any Gibraltar registered company which holds at least 25% voting share capital of a company registered in another member state, will not be liable to pay any Gibraltar corporation tax on any income derived from that company. Any dividends paid by a Gibraltar company to a company in another member state, which holds at least 25% of the Gibraltar company's voting capital, will not be liable to Gibraltar withholding tax. A recent interesting development involved EC Directive 90/435, which requires most member states to exempt dividends paid by subsidiary companies to parent companies from withholding tax, when both such companies are resident in EU countries. The Gibraltar 1992 Company concept was created with a view of specifically taking advantage of this directory. A Gibraltar 1992 Company is a Gibraltar resident of company, certified by the Gibraltar Financial & Development Secretary. Dividends paid by a Gibraltar 1992 Company are liable in Gibraltar to a withholding tax of only 1%. Interest paid to a non-resident by a Gibraltar 1992 Company will not be liable to withholding tax. The principal requirements for a company to be registered as a 1992 Company are:
- the company must have been registered or incorporated in Gibraltar on or after 1 January 1992;
- the company must be ordinarily resident in Gibraltar;
- the company's main objective must be to hold relevant participations;
- at least 51% of its annual income must derive from relevant participations;
- the company must have a proper physical presence in Gibraltar (ie. premises of at least 400ft² and a minimum of two employees);
- no Gibraltarian or resident of Gibraltar may have a beneficial interest in its share capital;
- a reasonable debt/equity ratio must be maintained. A Gibraltar 1992 Company's main benefit is in the area of withholding tax, since it is otherwise taxed in a similar manner to a company ordinarily resident in Gibraltar. Income not exempt under the Parent-Subsidiary Rules and the Gibraltar 1992 Company creates a tax efficient vehicle for the remittance or profits of a non-EU parent company. Rulings in member states will be necessary in order to confirm the viability of any particular structure.
Double Taxation Treaties
No double taxation treaties exist between Gibraltar an other countries. In practice, however, double taxation relief is granted on reciprocal basis in respect of certain UK and Commonwealth income. Other foreign tax paid on remitted income is treated as an allowable expense by concession.
Capital And Indirect Taxes
Gibraltar does not apply any investment income surcharge, capital gains tax, value added or sales tax or capital transfer tax. There is a varying scale of import duty. Excise duties are levied mainly on spirits, wines, tobacco and mineral oils.
Losses can be carried forward indefinitely but cannot be carried back. This relief applies to both local trading entities and qualifying companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
This article also appears in the 'International Offshore and Financial Centres Handbook 2001. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to email@example.com